Home improvement loans provide homeowners with access to funds for necessary repairs or upgrades that might otherwise be unaffordable upfront. Common projects funded by these loans include kitchen remodels, roof repairs, or room additions.

There are mainly two types of home improvement loans:

  • Unsecured loans, such as personal loans, which don’t require collateral but usually come with higher interest rates.
  • Secured loans, like home equity loans and HELOCs, which use your home as collateral and typically offer lower interest rates.

Personal loans offer a fixed lump sum repaid in monthly installments over 2 to 7 years, making them suitable for smaller projects or homeowners with limited equity. Learn more about personal loans on our Personal Loan page.

Home equity loans, often called second mortgages, provide a one-time lump sum based on your home’s equity that you repay with fixed monthly payments. This type is best for large, single projects. See details on Home Equity Loan.

HELOCs act similarly to credit cards, offering a revolving credit line secured by your home’s equity. You draw funds as needed during the draw period, typically 10 years, with variable interest rates, then repay principal and interest during the repayment period. These are ideal for ongoing or multiple projects. For more, visit our Home Equity Line of Credit (HELOC) article.

A cash-out refinance replaces your existing mortgage with a larger one, giving you the difference in cash to use for renovations. This option is suited for very large projects when mortgage rates are favorable.

When deciding which loan fits your project, consider the project size, your home’s equity, interest rates, repayment terms, and potential risks of securing a loan with your property. Always factor in fees such as closing costs and appraisals, especially for secured loans.

Common mistakes include:

  • Borrowing more than necessary, which can increase debt burden.
  • Overlooking fees and costs that impact overall loan expense.
  • Not comparing offers from multiple lenders.
  • Forgetting that secured loans put your home at risk if payments are missed.

Tax considerations: Interest on home equity loans or HELOCs may be tax-deductible if funds are used to improve the home securing the loan, per IRS guidelines. Interest on personal loans typically isn’t deductible.

By understanding these loan types and terms, you can select the best financing option for your home improvement needs, balancing affordability with your home’s value and your financial goals.